#111 Rental Property And Estate Planning

Micah Shilanski  00:05

Welcome back to the Plan Your Federal Retirement podcast. I’m your host Micah Shilanski, and with me, got another financial advisor on the line, so we have some detailed conversations on rental property and estate planning. Christian Sakamoto, thanks for joining me today, bud.

Christian Sakamoto  00:20

Hey, Micah, how you doing? 

Micah Shilanski  00:21

Ah, it’s another day in paradise, right? How can I complain?

Christian Sakamoto  00:24

Yes, yes. I’m excited, I’m excited to chat about this today, and, you know, another summer day, and how’s your weather in Alaska right now?

Micah Shilanski  00:33

Ah, you know what? We’re getting into fall, starting to cool down just a little bit, and so that’s always a good time, now I say cool down, right? For us Alaskans to hits over 70 degrees, I’m like, I’m dying of heat, right? I’m clawing at my throat. I know, It’s Alaskan thing, so anyways, it’s cooling down look at these beautiful fall days we only get we have a very short fall up here before all the leaves are gone, and then winter starts coming, so it’s pretty nice.

Christian Sakamoto  00:56

Nice, nice in Washington, it’s pretty good too, just a wonderful time of year, I love it this time here.

Micah Shilanski  01:01

That’s awesome. That’s fantastic. Well, let’s kind of jump into Chris, because we had a lot to talk about today, and we this, this came up because we work with clients one on one all the time, and this is something that we see, and this is actually something that you ran across working with a client the other day, and it was like saying, you know, a client has a rental property their daughters in side of the property as well as an owner, and then how does this work with estate planning, and we started batting around different ideas and helping come up with a plan, because we love to collaborate on our team, because it’s not a solo sport, it’s a team effort totally, and was like, hey, this could be a great information for our listeners, so I would say to pay attention to this. If you’re ever planning on dying, it’s probably going to be applicable to you, so kind of all of you, or if you have rental property as well, then we’re also going to get in the latter half of this, hopefully we have some time to rental properties, how to structure that, but estate planning is really, really important things that a lot of times we don’t like to talk about. 

Christian Sakamoto  01:55

And that’s right, and I know we talk about estate planning when our when we’re in our meetings with clients, and we kind of break it up, I would say, into more of just the educational side, just educating them on the importance of the documents, which documents they need to have, and then we go into what do they actually want to have happen for their unique situation, so a part of is just education then the next part is really understanding what they want to have happen. Now, Micah and I, we’re not estate planning attorneys, right? So we’re not the ones drafting these documents, but we like to really get into these details and have this conversation, so that when you’re working on these documents, it’s not just the first time that you’re thinking about these things and being able to ask questions to somebody that maybe has never thought about these topics before, really that far in depth. Death and dying, it’s not really a fun thing to be thinking about, right? And being in that situation mentally, putting yourself in that situation can be a little bit of a challenge. So, yeah, this is a very important topic.

Micah Shilanski  02:59

Yeah, Christian, you’re spot on, right? We’re going to be talking about things from a financial planning perspective, not from an advice perspective, because, you know, our audience is growing, really appreciate that, so click that like and subscribe button, right? Send this out so we can help another million people with retirement, but this is something that just applies to a lot of us, so we’re gonna talk about a broad brush on this, and this is a time to bring in a professional. No, we’re not trying to pitch our services, that’s not the intent here, but really work with someone that understands, because we have dozens of horror stories about when this goes wrong, and just like we’re talking about retirement, talking about cash flow, we’re talking about TSP, we want to throw the horror stories in there, so you know that mistakes can happen, but more importantly, we want to help you avoid those painful mistakes.

Christian Sakamoto  03:40

So, I guess part of the education piece with clients is we mentioned these three documents that they all have to have, everybody listening here has to have these three documents. So the first would be the will, the last will and testament, right? So the document that guides the probate process, where your stuff goes, God forbid you pass away. And then the other two have to do with not dying, but being incapacitated, so the durable power of attorney and then the advanced healthcare directive. Basically saying, what types of decisions do you want to have made, God forbid, if you’re incapacitated from a medical standpoint who’s going to be making those decisions, but also from the financial standpoint as well. And just having that education piece, now we always mention there’s another document there that isn’t always required, but it can be a piece to the financial plan, to their estate plan, which could be the revocable living trust. So what are your thoughts, Micah, when it comes to that revocable living trust, and when should somebody use a revocable living trust versus not?

Micah Shilanski  04:50

That’s a great question. Now, I like trust, right? I personally have one, a lot of my clients have them, I recommend them often, but they’re not for everybody, so Christian, I like to break this down into a couple different categories, a basic and advanced and a really advanced category, right? Our basic category, your 100% right? Will, healthcare, director of durable power of attorney, everybody needs those, and then that’s where we can kind of stop our planning at, we sure we’re doing some titling and some beneficiary stuff there’s some other things to do, but it’s not super advanced planning, and I like to call this the simple, I love you test, right? You know what? If you’re married, maybe you don’t have any kids, and it’s like the, hey sweetie, I love you, if I die, you get everything, if you die, I get everything, and that’s as complex as we need to be, beautiful don’t make it more complicated let’s leave it at that, right? Then life happens, and now we get kids, and kids get older, and we’re like, oh, all right, we’ve amassed some wealth, we’ve spent 30 year saving in the TSP, we got a seven figure net worth, if we both die, where’s that money going to go? But if we give little Timmy a million dollars, is he going to make some good decisions with it, or could it ruin his life, now we got to think about something, so we might have just selected ourselves from a basic plan to more advanced estate planning. This can also happen by rental property Christian, right? As soon as we get rental property in my mind, you’ve now triggered, it’s not an increasing rate, it’s a cliff kind of thing, you’ll automatically fall into a state plan, more advanced estate planning of things that we need to get done. So if we need to bring in a trust, like a revocable living trust, if we need to bring in an LLC, a limited liability for containing some high valued asset that has some litigation risk associated with it, now you’re automatically in advance planning. And then there’s the more advanced planning right? Which we’re not going to talk about on this podcast, but that’d be like a flip a family limited partnership and irrevocable trust, a Q-tip, and eyelet a whole little a lot of things going on, if you have no idea what those are and they don’t apply, don’t worry about it, if you do, then you definitely have more advanced planning that you need, really someone to kind of look at and help, they can get pretty complex. So Christian, let’s step back a little bit and kind of look at that trust that you were talking about, that revocable living trust. We keep throwing that revocable word in there, because that means you can make changes as long as you’re alive, it’s your trust you get to make changes, etc. When we change the spelling on words a little bit and we put that irrevocable, Right? In front of it, then all of a sudden you have a much different trust that you can’t make changes to. Yes, there’s some exceptions, I get that but, but it really locks your money up, so we’re going to live in the revocable living trust world for a little bit, Christian, does that sound good? 

Christian Sakamoto  07:25

I think that it makes a lot of sense, and you know, again, if we’re taking some very advanced, very complex cases, then the irrevocable trust could make some sense, right? Absolutely, kind of set those aside for for now when it comes to that revocable living trust you know, one of the questions I’ve thought through, and you know, we’ve had discussions on is, when would it make sense to use that, that trust, versus maybe just having a will that has something called a testamentary trust inside of it. You know, that’s something that we’ve, you know, we talked about, and had a discussion with attorneys, with on. So what are your thoughts when it comes to just the having that will have the trust itself, versus the just having a separate document? 

Micah Shilanski  08:08

Sure, so a testamentary trust, right? Christian, as you know, is basically you’re going to get a will. So if I’m married, my wife and I will both have a will, and inside of there’s a testamentary trust. Testament means intestate, so when I die, this trust gets created, and what’s going to happen is I can specify all of my rules in a trust, and I can almost do everything in a testamentary trust that I could do in a revocable, living trust. So a lot of times I hear from attorneys saying, hey, for families starting out that just have young kids, just do a testamentary trust, and Christian I don’t understand that. I gotta say, when I raise my hand right here, and I’ve never had a great explanation, except for one, as to why to do a testamentary trust versus a revocable, living trust. If you’re an attorney, listen to this and you have a great reason, man, please hit me up. I would love turn that, I’d love to always love increasing our knowledge base. The only difference I really see between the two from the attorney standpoint, is the cost per share, right? It’s normally double. So if a testamentary trust is X, then double, that is what a revocable trust is going to be, why is it double, I have no idea, it’s pre filled out forms, they’re putting in a format, they’re clicking prints, you’re getting 30 more pages, but that’s just Micah’s opinion. So it does cost more money, that’s going to be the downside, if a client, cashflow wise, is okay with the more money I am 100% going to recommend a revocable trust over a testamentary trust. The number one reason, there’s a second and third as well, but the number one reason is privacy. When I do a revocable trust that is a private document, I do not have to give it out, and in fact, I do not give it out to a lot of people, the only thing I have to give out, by law, because it’s made public, is my will, a will is a public document, so if I put my trust inside of my will, that’s a testamentary trust, I’ve now made my trust a public document, and I’m kind of thinking about privacy thing, right? So I’m not a big fan of that, but Christian, there’s some other reasons why we may not like that as well, right? 

Christian Sakamoto  10:12

Yes, yes, and I would say testamentary trust versus the revocable living trust, they’re going to be good tools, and they both can allow things like special needs provisions and spend thrift provisions if that’s a concern, where maybe the beneficiary, or somebody that we wanting to give money to might have a spending problem or not have special considerations for special needs. So we both get to do those inside of them, which I like, but yeah, I think that having the revocable living trust allows a little bit more, you know, control the privacy, like you mentioned a lot of states we’ve seen as the one document, the one trust for both the husband and the wife, or both spouses, and being able to just have that one document to make changes to, versus having each spouse having a will, having to make, you know, kind of a little bit of a change when it comes to anytime they want to make a change, there’s now two documents, both wills with the testementary trust, we have to do a little bit more, you know, details with their I guess, naming different conventions for them, so.

Micah Shilanski  11:16

And Christian on that note, sorry to interrupt, but, but on the note, it’s not a matter of us having to do more work, that’s not the issue, right? And I know you know this, I just want to draw this out with for our listeners, is that’s where we see mistakes. Anytime we unnecessarily complicate something, you’ve made it more prone to mistakes, and you and I have both pulled estate planning documents that they were mistakes in, and the more documents we have, the plethora of mistakes, we’re working with a business owner that has multiple LLCs, multiple trusts, all of these things going on, and he’s paid a lot of money for this, and we’re reading through it, and some of these documents conflit each other, and I be like, hey, we had to kind of draw it out, and the attorney has to go back and fix it, great news the attorney is going to charge to go back and fix it, you know, but it’s, it’s anytime we have more documents, you’re increasing that level of confusion, so sometimes it’s necessary, but sometimes I’m gonna hit the pause button and say, hey, yeah, I’m gonna spend a little bit more money, but can I make this a little bit more simple so it’s easier to update in the future.

Christian Sakamoto  12:18

Exactly, exactly, and one of the themes, one of the things we’re chatting through is, as we’re moving on from kind of a basic estate plan to more advanced planning, and we’re now looking at including a trust, what would be the triggering reasons why we’d want to have it? Well, you know, like I mentioned, having a little bit more control where we have to spend through provisions or special needs provisions, we can have, maybe minor children or grandchildren for that matter, you can name when they can get the money, when they have access to money, but there’s also other reasons, you know, I’d say another one would be if you own property in multiple states, great reason, a lot of times that’s a triggering reason why a trust, instead of having to go through the probate process in two different states, now you have the trust that guides that entire process after death, and you don’t have to do the probate process in multiple different states, right? Because now we don’t have to even go through probate if we have a trust. 

Micah Shilanski  13:12

Listen, just a pull in that thread a little bit more your 100% right, right? That’s called our ancillary probate, and to make it even worse, I’m going to throw some, you know, salt on this one right here, let’s say you own property in a state that requires state probate, County probate, City probate, now, all of a sudden, you have three different probates, plus your home probate you have to do, so now you have four different probates that you have four different court sponsor processes you have to go through and make thousands of dollars to get through if you didn’t title that property correctly and have it outside, so that’s a great reason for a trust, right there, you’re saving four different probates on one property. Now, there’s only a couple states that are that bad, right? Most states, they only have a state level probate, but these are things we got to be aware of when we’re owning property in multiple even our own state.

Christian Sakamoto  13:59

Absolutely, and I know you mentioned the other one with having an LLC, so again, a little bit more control there, especially that you get to plan for it now, as opposed to kind of burying your head in the sand and worrying about it later, this is just a little bit more thoughtful and helps not create a mess, God forbid someone passes away.

Micah Shilanski  14:17

Yeah, let’s pull the thread on that LLC just a little bit, right? Because we have the trust which is really powerful, let’s talk a little bit about how an LLC works, and then, if we had some time, let’s kind of incorporate titling, because it’s, as you know, it’s not just as important to get the documents done, you have to fund your estate planning, what I mean by that is you have to transfer title of the things that you’ve created, things that you own into the things that you’ve created, so if I own a house and I create a trust, my next step is to put my house in the name of the trust, and so I gotta fund the trust with that, I gotta put my bank accounts, I gotta change my beneficiaries, right? There’s a lot of things I have to do to get this set up, so that’s on our trust, then we have this LLC, this limited liability company again, all our Insert disclosures here not attorneys, right? Making no representations or representations, this is our understanding from a financial planning perspective, and we like LLCs when we have high value properties that have liability associated with the easiest one for our clients is where our property, you own a rental property, you’re in Alaska, ice slips off the roof, falls and hits someone that wasn’t supposed to be on the property in the head, who’s responsible? Well, that was an actual court case, the owner of the property was responsible, and you could argue with it all day long, at the end of the day, they had to pay. And so now we look at saying, how do we create an LLC to put a moat around this property, so we have a rental property, we then create an LLC, limited liability company, and then that LLC owns that property. Now you control the LLC, so I don’t care about ownership, I care about control, right? Who’s controlling at the end of the day, the LLC owns the property you control the LLC, and then if you operate it properly, you have some liability protection that if something happens on that property and you end up in litigation, all they get to go after is that property, it’s hard to get past that LLC and go after your personal assets. So these are things in your planning we need to look at, maybe that’s an airplane, maybe that’s a high valued boat that you have, maybe that’s a rental property, maybe that’s a business, these are all different things that we should look at LLCs for.

Christian Sakamoto  16:25

I think that’s great. One of the cases we met with one of my clients, and this was an opportunity that you had said that would be good fit for them, so the context is, woman owns the piece of property in a different state, she has her primary residence in the state she lives in, in a different state she owns it half, she has 50% ownership, and then the daughter has 50% ownership, and the daughter is living in that that she owns half of but then the mother is renting the other half of the house out, and there’s some rental property as well inside of that, so talk about how that would be structured, not just to have a trust, because, okay, this is triggering, hey, we need to have a trust because there’s property in multiple states, but why would the LLC be important, and how would that actually look for that?

Micah Shilanski  17:08

That’s such a great question Christian, because many moving parts here, right? She has a partnership inside of there, so one of the things I would, I’d be asking, because you own property, like, what type of tax returns are being filed? You know, how are you reporting this income, is it on a partnership return, is it just on Schedule E, are you splitting it between Schedule E, is a one Schedule E, right? So there’s a lot of great questions we’re going to start asking when we find out about this, and then I would, sorry I jumped in, you asked me an estate question and risk question, I immediately jump to taxes, that’s where I get excited about, sorry back to your question, I would absolutely be looking at, do we have a conversation about an LLC for this property? Now, somebody lives there, so it’s a little bit more complex, one of the owners lives in the property, but one of the thing you might want to think about, the clients might want to think about is, do we put an LLC in this to own this rental property? Then the daughter who lives there, would sign a rental agreement with the LLC, sounds a little funny, right? Because she’s a tenant as well as an owner, but she’d sign a rental agreement that would be there with an LLC, and then whoever the other tenants are, they would also sign agreements with the LLC. What this does, from the mom and daughter’s perspective, is that kind of limits and reduces some liability that she’s going to have with that property. Now, there’s some other considerations to have when you’re an owner inside of your own LLC, some tax things we don’t have time to talk about, some things to think about, but I would definitely want to have that conversation to say, hey, is this appropriate to help reduce liability? Now, with that right, there’s two owners each own 50% and this comes to an ownership question, and Christian again, I know you know this, but sometimes we run into a lot of misconceptions on how titling works, and people are like in the mom and daughter’s perspective, and I’m not saying this is their thought, this is a common thing we hear is saying, oh, we both own it, joint tenants with rights of survivorship, so when I die, she just gets the entire property. And I understand that misconception, because when we’re married, we have that ability to title things joint tenants with types of survivorship. We don’t have that ability when we’re not married, so in this case, with a mother and daughter, that doesn’t work that way, the mother’s estate the mother owns her interest, if she dies, her estate documents get to step up and come into play, and then, depending on what her estate document says, where that property is going to go to, it may or may not go to the daughter, just because she’s a 50% owner on the property doesn’t mean she gets it.

Christian Sakamoto  19:31

Fascinating, right? So we have that joint tenants with right of survivorship, and then the other joint tenant would be tenants in common, correct? And that’s, that’s how it’s going to be a little bit different there. What are some other examples of titling, we’ve got joint, but we also have single, right? So just a single owner, but then we also have an entity ownership, so think like an LLC, a trust can owner. What would be another example of a another entity owning it? 

Micah Shilanski  19:58

You know, trust in LLC is probably where I go, you can have an S corp, you have different corporations could own it as an entity, sure, but it’s generally going to fall broadly into a trust or corporation, corporation would be an LLC. Then I throw in there as well, one type of ownership that could be weaved into all of these is community property. Depending on if you’re in, what is it Christian nine, nine states that have community property?

Christian Sakamoto  20:22

Yeah, nine states looked it up, so Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. 

Micah Shilanski  20:29

Oh, but we’re missing something here.

Christian Sakamoto  20:31

I think Alaska’s not on that list, is it? 

Micah Shilanski  20:33

Alaska’s not on that list, but we are I gotta say it’s my Alaska pride coming out right now, we are a quasi community property state, and so in Alaska, you could elect it to have community property on certain assets and not on others. As far as I know, we’re the only quasi community property state, so it’s kind of 10 that are out there, and community property is a tax election also has an effect in divorce, I hope that’s not an issue for anybody listen to this, but it’s mainly a tax election upon death, that you receive an enhanced tax benefit if something is titled in community property.

Christian Sakamoto  21:06

Another question I have for you Micah, when would you say somebody should be going and doing these documents themselves, when should they, when should they think, okay, I can do these documents myself, either not going to insert the company’s different names online, you can look them up to generate your own will you fill out in those different documents and even trusts. When should they do that themselves versus hire an attorney?

Micah Shilanski  21:30

So if this goes to a basic I love you situation now, young couple, single person, no kids in the picture. Man, legalzoom.com, wealth.com you know, whatever online service that’s there probably is going to do an okay job and get the job done for you. Anytime we go to from basic to advanced, it’s more complicated that or we involve a trust or an LLC, Christian I like an attorney involved, I haven’t seen an online program produce a trial handles the tax consequences of retirement accounts, and people don’t know this, they run into a problem they don’t even know exists, right? And retirement accounts are pretty particular and how things have to be set up and and under the secure act 2.0 some things were loosened up under teach TCJA, Tax Cut Job Act, some things were loosened up as well, to make it a little bit better, but there’s still some rules that you really have to follow on a trust not to give half of your money to the IRS when you die, and it can easily happen, and so that’s the one that I’m, hey, hit the pause button, let’s bring in a professional to make sure it gets done correctly.

Christian Sakamoto  22:34

Yeah, I agree, I think that makes a lot of sense, too, and especially if we’re talking about certain terms and taxes, I’m sure those online places are doing a good job, but it’s almost like we don’t know what we don’t know, and I don’t mean that disrespectfully, but we have to just get that certainty when it comes to anything a little bit more advanced I’d say.

Micah Shilanski  22:54

And Christian I mean, personally, I’ve done both, right? So I want to see what clients experiences are, so I’ve paid for Legal Zoom, I’ve gone through different things, I’ve paid for an attorney, the documents I signed were the ones drafted by the attorney. Those are the ones that I have my confidence in. 

Christian Sakamoto  23:07

Yeah, that makes sense.

Micah Shilanski  23:08

Perfect, well, Christian this podcast, not only those talking about estate planning and all these great things that we enjoy, hopefully our listeners do as well, it’s about learning and it’s about taking action, right? Of course, it’s an election year, so I had to be saying, vote early, vote often, give us five stars on this, share this podcast out with other people, no, I wasn’t going to go political, come on, guys, right, share this podcast out, we absolutely want to change people’s lives in the way we do that is by getting this information out, so we want to say thank you to all of our listeners and doing that, and Christian what’s another action item our listeners can implement this week?

Christian Sakamoto  23:40

As we’re talking about estate planning, if you don’t have those bare minimum three documents, the will, the durable power of attorney, the advanced healthcare directive, you have to get them, you have to get them, and if you do have them, it’s a good time to review. You don’t need to review them every month, but every year or two, it’s good to dust those documents off that you’ve already put in place and see if they are still with what your wishes are on those documents.

Micah Shilanski  24:04

I love it. Another item I’m going to say, and this please is not a plug for us, but work with somebody who understands how all of these documents should look together, and who’s going to step back and look at the 30,000 foot view. What do I mean by that? You know, look at your net worth statement, where do you own everything, is it really titled the way you think it is? We didn’t talk about beneficiaries, I know we have in the previous pod, but it’ll go through this beneficiary designation, super, super important. Do people know your executor, your executive trust, your personal representative trustee, etc. Do they know where your documents are, right? These are really important things that when you pass away, it leaves such a wake behind in your life, and you could choose how big that wakes gonna be. You can choose to allow your family to grieve, to process things, to do it and not have to worry about all this other stuff, or you can choose to leave a mess, and it’s your choice, and Christian, we’ve seen it both ways. My preference is, do the work now, don’t leave your family in a mess at that time, make it at least easier for them when you pass away. 

Christian Sakamoto  25:01

Amen, I agree. 

Micah Shilanski  25:02

Awesome, well until next time Christian, thank you so much for joining us, and until then, Happy Planning!